BILL NUMBER: SB 822	CHAPTERED  10/10/99

	CHAPTER   780
	FILED WITH SECRETARY OF STATE   OCTOBER 10, 1999
	APPROVED BY GOVERNOR   OCTOBER 7, 1999
	PASSED THE SENATE   AUGUST 30, 1999
	PASSED THE ASSEMBLY   AUGUST 23, 1999
	AMENDED IN ASSEMBLY   JULY 15, 1999
	AMENDED IN SENATE   JUNE 1, 1999

INTRODUCED BY   Senator Escutia

                        FEBRUARY 25, 1999

   An act to add Article 3 (commencing with Section 104555) to
Chapter 1 of Part 3 of Division 103 of the Health and Safety Code,
relating to the tobacco manufacturers' master settlement agreement.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 822, Escutia.  Tobacco product settlement.
   Existing law provides for various programs for the reduction in
the inappropriate use of cigarettes and tobacco products.
   Under existing law, certain tobacco product manufacturers have
entered into an agreement with the federal government and
participating states regarding the allocation of funds on the basis
of tobacco products sold within each state.
   This bill would specify that any tobacco product manufacturer
selling cigarettes to consumers within the state shall either become
a participating manufacturer under the terms of the settlement
agreement entered into by the states and certain tobacco
manufacturers and perform its financial obligations under the
settlement, or place an amount of funds, calculated on the basis of
units of tobacco products sold, into an escrow fund.  The bill
specifies that the funds in the escrow fund shall be used to pay a
judgment or settlement on any released claim against the tobacco
product manufacturer by the state or be released to the tobacco
product manufacturer in certain circumstances.  The bill would
authorize the Attorney General to bring a civil action on behalf of
the state against any tobacco product manufacturer that fails to
place the funds into escrow, and would specify penalties for any
knowing violation of the requirement to place the funds into escrow.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Article 3 (commencing with Section 104555) is added to
Chapter 1 of Part 3 of Division 103 of the Health and Safety Code, to
read:

      Article 3.  Master Settlement Agreement

   104555.  The Legislature finds and declares all of the following:

   (a) Cigarette smoking presents serious public health concerns to
the state and to the citizens of the state.  The Surgeon General has
determined that smoking causes lung cancer, heart disease, and other
serious diseases, and that there are hundreds of thousands of
tobacco-related deaths in the United States each year.  These
diseases most often do not appear until many years after the person
in question begins smoking.
   (b) Cigarette smoking also presents serious financial concerns for
the state.  Under certain health care programs, the state may have a
legal obligation to provide medical assistance to eligible persons
for health conditions associated with cigarette smoking, and those
persons may have a legal entitlement to receive such medical
assistance.
   (c) Under these programs, the state pays millions of dollars each
year to provide medical assistance for these persons for health
conditions associated with cigarette smoking.
   (d) It is the policy of the state that financial burdens imposed
on the state by cigarette smoking be borne by tobacco product
manufacturers rather than by the state to the extent that those
manufacturers either determine to enter into a settlement with the
state or are found culpable by the courts.
   (e) On November 23, 1998, leading United States tobacco product
manufacturers entered into a settlement agreement, entitled the
Master Settlement Agreement, with the state.  The Master Settlement
Agreement obligates these manufacturers, in return for a release of
past, present, and certain future claims against them as described
therein, to pay substantial sums to the state (tied in part to their
volume of sales); to fund a national foundation devoted to the
interests of public health; and to make substantial changes in their
advertising and marketing practices and corporate culture, with the
intention of reducing underage smoking.
   (f) It would be contrary to the policy of the state if tobacco
product manufacturers who determine not to enter into such a
settlement could use a resulting cost advantage to derive large,
short-term profits in the years before liability may arise without
ensuring that the state will have an eventual source of recovery from
them if they are proved to have acted culpably.  It is thus in the
interest of the state to require that these manufacturers establish a
reserve fund to guarantee a source of compensation and to prevent
those manufacturers from deriving large, short-term profits and then
becoming judgment proof before liability may arise.
   104556.  The definitions contained in this section shall govern
the construction of this article.
   (a) "Adjusted for inflation" means increased in accordance with
the formula for inflation adjustment set forth in Exhibit C to the
Master Settlement Agreement.
   (b) "Affiliate" means a person who directly or indirectly owns or
controls, is owned or controlled by, or is under common ownership or
control with, another person.  Solely for purposes of this
definition, the terms "owns," "is owned," and "ownership" mean
ownership of an equity interest, or the equivalent thereof, of 10
percent or more, and the term "person" means an individual,
partnership, committee, association, corporation, or any other
organization or group of persons.
   (c) "Allocable share" means allocable share as that term is
defined in the Master Settlement Agreement.
   (d) "Cigarette" means any product that contains nicotine, is
intended to be burned or heated under ordinary conditions of use, and
consists of or contains (1) any roll of tobacco wrapped in paper or
in any substance not containing tobacco; or (2) tobacco, in any form,
that is functional in the product, which because of its appearance,
the type of tobacco used in the filler, or its packaging and
labeling, is likely to be offered to, or purchased by, consumers as a
cigarette; or (3) any roll of tobacco wrapped in any substance
containing tobacco which, because of its appearance, the type of
tobacco used in the filler, or its packaging and labeling, is likely
to be offered to, or purchased by, consumers as a cigarette described
in this section.  "Cigarette" also includes "roll-your-own" tobacco,
meaning any tobacco which, because of its appearance, type,
packaging, or labeling is suitable for use and likely to be offered
to, or purchased by, consumers as tobacco for making cigarettes.  For
purposes of this definition of "cigarette," 0.09 ounces of
"roll-your-own" tobacco shall constitute one individual "cigarette."
   (e) "Master Settlement Agreement" means the settlement agreement
and related documents entered into on November 23, 1998, by the state
and leading United States tobacco product manufacturers.
   (f) "Qualified escrow fund" means an escrow arrangement with a
federally or state chartered financial institution having no
affiliation with any tobacco product manufacturer and having assets
of at least one billion dollars ($1,000,000,000) where the
arrangement requires that the financial institution hold the escrowed
funds' principal for the benefit of releasing parties and prohibits
the tobacco product manufacturer placing the funds into escrow from
using, accessing, or directing the use of the funds' principal except
as consistent with subdivision (b) of Section 104557.
   (g) "Released claims" means released claims as that term is
defined in the Master Settlement Agreement.
   (h) "Releasing parties" means releasing parties as that term is
defined in the Master Settlement Agreement.
   (i) "Tobacco product manufacturer" means an entity that after the
date of enactment of this article directly, and not exclusively
through any affiliate:
   (1) Manufactures cigarettes anywhere that the manufacturer intends
to be sold in the United States, including cigarettes intended to be
sold in the United States through an importer (except where the
importer is an original participating manufacturer as that term is
defined in the Master Settlement Agreement, that will be responsible
for the payments under the Master Settlement Agreement with respect
to such cigarettes as a result of the provisions of subsection II(mm)
of the Master Settlement Agreement and that pays the taxes specified
in subsection II(z) of the Master Settlement Agreement, and provided
that the manufacturer of such cigarettes does not market or
advertise such cigarettes in the United States) or
   (2) Is the first purchaser anywhere for resale in the United
States of cigarettes manufactured anywhere that the manufacturer does
not intend to be sold in the United States; or
   (3) Becomes a successor of an entity described in paragraph (1) or
(2).
   The term "tobacco product manufacturer" shall not include an
affiliate of a tobacco product manufacturer unless the affiliate
itself falls within any of paragraphs (1) to (3) of this subdivision.

   (j) "Units sold" means the number of individual cigarettes sold in
the state by the applicable tobacco product manufacturer, whether
directly or through a distributor, retailer, or similar intermediary
or intermediaries, during the year in question, as measured by excise
taxes collected by the state on packs, or "roll-your-own" tobacco
containers, bearing the excise tax stamp of the state.  The State
Board of Equalization shall adopt any regulations as are necessary to
ascertain the amount of state excise tax paid on the cigarettes of
the tobacco product manufacturer for each year.
   104557.  (a) Any tobacco product manufacturer selling cigarettes
to consumers within the state, whether directly or through a
distributor, retailer or similar intermediary or intermediaries,
after the date of enactment of this article shall do one of the
following:
   (1) Become a participating manufacturer as that term is defined in
Section II(jj) of the Master Settlement Agreement and generally
perform its financial obligations under the Master Settlement
Agreement; or
   (2) Place into a qualified escrow fund by April 15 of the year
following the year in question the following amounts, as such amounts
are adjusted for inflation:
   (A) For 1999:  $0.0094241 per unit sold during that year, after
the date of the enactment of this article.
   (B) For 2000:  $0.0104712 per unit sold during that year.
   (C) For each of 2001 and 2002:  $0.0136125 per unit sold during
the year in question.
   (D) For each of 2003 through 2006:  $0.0167539 per unit sold
during the year in question.
   (E) For each of 2007 and each year thereafter:  $0.0188482 per
unit sold during the year in question.
   (b) Any tobacco product manufacturer that places funds into escrow
pursuant to paragraph (2) of subdivision (a) shall receive the
interest or other appreciation on the funds as earned.  The funds,
other than the interest or other appreciation, shall be released from
escrow only under the following circumstances:
   (1) To pay a judgment or settlement on any released claim brought
against that tobacco product manufacturer by the state or any
releasing party located or residing in the state.  Funds shall be
released from escrow under this subdivision (i) in the order in which
they were placed into escrow and (ii) only to the extent and at the
time necessary to make payments required under that judgment or
settlement.
   (2) To the extent that a tobacco product manufacturer establishes
that the amount it was required to place into escrow in a particular
year was greater than the state's allocable share of the total
payments that the manufacturer would have been required to make in
that year under the Master Settlement Agreement, , had it been a
participating manufacturer, as such payments are determined pursuant
to section IX(i)(2) of the Master Settlement Agreement and before any
of the adjustments or offsets described in section IX(i)(3) of that
agreement other than the inflation adjustment, the excess shall be
released from escrow and revert back to such tobacco product
manufacturer; or
   (3)  To the extent not released from escrow under paragraph (1) or
(2) of subdivision (b), funds shall be released from escrow and
revert back to the tobacco product manufacturer 25 years after the
date on which they were placed into escrow.
   (c) Each tobacco product manufacturer that elects to place funds
into escrow pursuant to paragraph (2) of subdivision (a) shall
annually certify to the Attorney General that it is in compliance
with paragraph (2) of subdivision (a), and subdivision (b).  The
Attorney General may bring a civil action on behalf of the state
against any tobacco product manufacturer that fails to place into
escrow the funds required under this section.  Any tobacco product
manufacturer that fails in any year to place into escrow the funds
required under this section shall:
   (1) Be required within 15 days to place the funds into escrow as
shall bring it into compliance with this section.  The court, upon a
finding of a violation of paragraph (2) of subdivision (a), or
subdivision (b), may impose a civil penalty to be paid to the General
Fund of the state in an amount not to exceed 5 percent of the amount
improperly withheld from escrow per day of the violation and in a
total amount not to exceed 100 percent of the original amount
improperly withheld from escrow.
   (2) In the case of a knowing violation, be required within 15 days
to place the funds into escrow as shall bring it into compliance
with this section.  The court, upon a finding of a knowing violation
of paragraph (2) of subdivision (a), or subdivision (b), may impose a
civil penalty to be paid to the General Fund in an amount not to
exceed 15 percent of the amount improperly withheld from escrow per
day of the violation and in a total amount not to exceed 300 percent
of the original amount improperly withheld from escrow.
   (3) In the case of a second knowing violation, be prohibited from
selling cigarettes to consumers within the state, whether directly or
through a distributor, retailer, or similar intermediary, for a
period not to exceed two years.
   (d) Each failure to make an annual deposit required under this
section shall constitute a separate violation.
